Other Peoples’ Money is No Way to Finance Health Care

In a recent Town Hall column I discussed hospitals in the Bronze Age, as some hospitals have begun competing for patients’ business for those services that patients can shop for. As more patients are exposed to significant cost-sharing, they ask questions about the price of services and balk after experiencing sticker shock — and go look elsewhere. There’s another side to this story. A recent Bloomberg article discussed hospitals struggling to collect cost-sharing funds owed by patients.

Patients’ out-of-pocket spend was only about 11 percent in 2014 and out-of-pocket payments in hospitals was about 3 percent. Yet, some consumers have deductibles that made their share of hospital bills a bite in the wallet. The typical Silver Plan has deductibles of $2,556 while Bronze Plans often have $5,328. Apparently, if someone owes more than 5 percent of their annual income on a hospital bill, the likelihood of collecting is about nil.

How much is a hospital stay worth that potentially can extend life? It depends on who’s paying for it. Years ago I took class on cost-benefit analysis. The purpose was to compare the efficiency of public policy interventions designed to extend life. At that time, the rule of thumb for the societal value of a “life-year” was approximately $50,000. Policies that saved a life-year for less than $50,000 were considered a good deal. Policies that cost more per life-year were not.

People themselves often make these trade-offs. Many willingly choose a riskier job because they either consider it more enjoyable or it compensates them in return for the increased risk. Say you’re a desk jockey at the Department of Motor Vehicles and you decide to train to become a fireman. For the sake of argument, let’s assume firemen have a 10 percent greater chance of dying on the job each year compared to the DMV, but firemen’s annual pay is $5,000 more. In this example, you would willingly take a riskier job for the equivalent of $50,000 per life year saved ($5,000/.10).

A 2014 study of mandatory health coverage in Massachusetts estimated the law saved a life-year at a cost to state residents of between $4 million to $5 million for each year saved. The dollar amount is undoubtedly higher now, but many experts assume Obamacare has a similar societal cost per life-year saved. Supporters believe that statistical lives theoretically extended at $5 million per year is a bargain, because it is mostly paid for with other peoples’ money (OPM).

When crafting health and safety regulations that impose higher costs on others, government bureaucrats consistently assign a much higher value on human life-years than people themselves when making their own decisions. The reason for this is that government mandates are always paid for with OPM. For those unfamiliar with the topic, OPM is often assumed to come from the same tree from which Obama and his fellow liberals derive all the free stuff they promise to give us. OPM is sort of like magic pixie dust that makes politicians’ big promises possible.

Obamacare achieves (or fails to achieve) most of its goals using OPM. The premiums for exchange plans that don’t reflect actuarial risk; the premium subsidies for moderate-income folks; cost-sharing subsidies and the plethora of mandated benefits and costly regulations all rely on a hefty dose of OPM.

The problem is: OPM doesn’t actually grow on trees as many people mistakenly believe. It comes from other peoples’ wallets! For example, last December an insurance agent informed my wife she would have to cough up $6,000 annually for a health plan with a $6,750 deductible. That was the best deal she could get. Why were her premiums going to be so high she asked? Because her insurer was forced to dole out about $400 million more on Obamacare enrollees than it took in from their premiums the year before. Yet, despite spending $6,000 she would have to pay the entirety of her medical bills out of pocket because the likelihood of her surpassing a deductible that high is pretty close to zero. At the same time, many of the people who were the net beneficiaries of her premiums the year before presumably could not pay their share of the deductibles — although many likely got cost-sharing subsidies, which is arguably why their spending was so high.

As a society we want everyone to have access to medical care that currently costs about $9,231 per capita and rising. Yet, many Americans would direct their share of funds to different priorities if allowed. Paradoxically, many families are paying $12,000 to $15,000 for family health coverage with deductibles so high they cannot afford their out-of-pocket expenses. Think of it this way: People are required to buy coverage that makes expensive medical care available to other people. But many people with expensive health coverage cannot afford to see a doctor, have an MRI or a small procedure performed on them. Something is wrong with this picture.

The current system is unsustainable. Increasingly, people are beginning to balk. Sooner or later it will run out of other peoples’ money. My family’s premiums (about $1,000 a month for a family of two plus one dog who is technically uninsured) is equal to the payments on many couples’ two cars, a month’s rent or nearly a mortgage payment for many families. A better way to reform health care is to allow Americans to buy an affordable plan that meets their needs and allows enough money left over to see a doctor. It will also require better solutions to provide more efficient care to America’s sickest residents.